China Report: Internalizing Climate Mitigation for Financial Policy-Makers

Policy Lever: Directing Finance Through Policy

Policy directed finance approaches introduce requirements or prohibitions that shift capital allocation. Such measures in effect introduce new performance criteria into financial decision-making, which might reduce or increase risk-adjusted returns. The Inquiry found that measures that change the legal requirements facing financial institutions are perhaps the most contentious, but are also widely used.

Examples

Examples in practice include:
  • Lender and other liabilities: legal liability regimes for lenders, fiduciaries and insurers (and responses in terms of due diligence for environmental risk).
  • Capital requirements: adjustments to capital ratios to enable lending towards critical sectors (e.g. for SMEs, green assets).
  • Priority sector lending: integration of environmental and social factors into priority lending programmes.
  • Prohibitions: restrictionson financial transactions due to excessive societal costs e.g. lending to illegal deforestation (Brazil) and pollution intensive industrial plants (China).
  • Directed service provision: requirements that financial institutions provide access to particular financial services such as basic bank accounts and insurance.
  • Mandatory purchase requirements: mandatory requirements for purchase of key financial services (such as insurance) that are essential for system resilience in the face of environmental stress.

Impacts

Measures such as priority lending and strengthened environmental liability have a strong potential for driving change, but need careful design and market preparation to avoid unintended consequences.    

Inquiry Publications

  • China Report: Internalizing Climate Mitigation for Financial Policy-Makers

    Date: 06-Oct-2015

    The paper also shows how the  objectives of financial policy-makers—such as investor protection, transparency, maintaining the safety and soundness of financial firms, financial stability, tackling systemic risk, reducing information asymmetries, tacking market failures and developmental objectives— offer multiple avenues to legitimize policy measures that can contribute to the greening of the financial system. In particular,

  • India Country Report

    Date: 29-Apr-2016

    An India Advisory Council of the UNEP India Inquiry was convened by the Federation of Indian Chambers of Commerce and Industry (FICCI). This report highlights key proposals emerging from their discussions for aligning the Indian financial system with sustainability. In the Indian context, they call for development of a more robust and resilient ‘sustainability-oriented market framework’ focused

  • Indonesia Country Report

    Date: 30-Apr-2015

    Placing Indonesia’s economy onto a green and sustainable development pathway, as envisaged in the National Long Term Development Plan, will require a large mobilization of investment. Estimates of the annual investment needed are in the order of US$300‐530 billion, with a large portion of this investment needed in critical infrastructure, as well as environmentally sensitive

  • Bangladesh Country Report

    Date: 09-Oct-2015

    Bangladesh has been a leader in developing policies to shape a greener and more inclusive financial system. It has a suite of green banking regulations and policies including concessional green refinancing, credit quotas for green finance and guidance and requirements on environmental due diligence. Green finance is growing but it remains modest compared to the scale of Bangladesh’s

  • China Report

    Date: 06-Oct-2015

    The Inquiry collaborated in an 18-month project, Greening China’s Financial System, carried out by the International Institute for Sustainable Development (IISD) and the Finance Research Institute (FRI), Development Research Center (DRC) of the State Council. The aim was to develop specific proposals for greening China’s financial system, based on an analysis of current practice in China

  • France Country Report

    Date: 23-Nov-2015

    This report highlights experience from France in improving the integration of sustainability issues into financial decision-making. A key area of focus has been on improving information and market analysis. Environmental, social and governance (ESG) reporting requirements were first introduced in the New Economics Regulation law of 2001, and strengthened by the 2010 ‘Grenelle II’ law and 2015 the

  • UK Country Report

    Date: 14-Jan-2016

    This paper looks at the steps that the UK has taken towards a sustainable financial system shaped by its role as a global financial centre and a distinctive dynamic between social entrepreneurs and civil society organisations, market innovation and policy frameworks.The City of London is not only home to some of the world’s largest financial markets, but

  • Experience and Lessons from South Africa: An Initial Review

    Date: 17-Jun-2016

    This paper provides an outline of South Africa’s financial sector, the environmental and social issues it faces, the response of government and financial regulators and the extent to which has resulted in measurable sustainable investment flows. In South Africa environmental, social and governance (ESG) considerations appear on the agenda of strategic discussions and are part of the

  • 3rd Update Report: Pathways to Scale

    Date: 07-Jan-2015

    This is the 3rd Update Report of the UNEP Inquiry, it is focused on the challenge of financing the low-carbon transition. It explores how innovative ideas and practices can be made more effective, adopted more widely, and taken to scale—and as a result move the trillions that are required. Scaling-up proven but limited innovations, is a common

  • Central Banks Can and Should Do Their Part in Funding Sustainability

    Date: 10-Jun-2014

    In this paper Andrew Sheng argues that central banks, when purchasing financial assets, should consider selecting assets that will promote sustainability, including climate change mitigation and adaptation. Social impact investing he argues is consistent with a central bank’s mandate to maintain price stability. They could incentivize bankers and asset managers to invest in, or lend to, climate mitigation activities and low-emission

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